Three major concerns eliminated! Morgan Stanley is bullish on Taiwan Semiconductor and reaffirms "Overweight" rating

According to Zhitong Finance APP, Morgan Stanley released a research report stating that Taiwan Semiconductor (TSM.US) has alleviated three major concerns in the recent first-quarter earnings call, and its stock price is expected to undergo a re-rating. The firm holds an optimistic outlook on Taiwan Semiconductor's future development, reiterating its "overweight" rating on the stock, with a target price maintained at NT$1,288.

Morgan Stanley mentioned in the report that the anticipated rise in Taiwan Semiconductor's stock price is primarily attributed to the positive changes in the following three factors:

Elimination of the possibility of a joint venture wafer fab in the U.S.: Taiwan Semiconductor's management clearly stated that there are currently no discussions with other companies regarding joint ventures, technology licensing, or transfers. This statement alleviated investors' concerns about Intel's (INTC.US) joint venture plans and solidified Taiwan Semiconductor's leadership position in the long-term market.

Strong demand for artificial intelligence (AI): Taiwan Semiconductor still maintains its target of achieving a compound annual growth rate (CAGR) of over 40% for AI semiconductor revenue over the next five years. Despite market concerns about a reduction in CoWoS orders, Taiwan Semiconductor expects its CoWoS capacity to double by 2025 and continue to grow in 2026.

Limited impact of tariffs: Although there are concerns in the market regarding semiconductor tariffs, Taiwan Semiconductor's second-quarter revenue guidance indicates a 13% quarter-on-quarter revenue growth, far exceeding the firm's expected 4%, and currently, tariffs have not had a significant impact on customer orders.

In terms of financial data, Taiwan Semiconductor's gross margin for the first quarter of 2025 is 58.8%, surpassing market expectations, mainly due to strong demand for 3nm and 5nm processes. The gross margin for the second quarter is expected to be 58% (median), slightly lower than the first quarter but still at a healthy level. Morgan Stanley expects Taiwan Semiconductor's earnings per share (EPS) to maintain stable growth from 2025 to 2027, with a projected CAGR of over 20% from 2024 to 2027.

From a risk and opportunity perspective, if new tariff policies are introduced, global semiconductor demand may decline, and Taiwan Semiconductor may need to adjust its revenue guidance for 2025. However, in the long term, Taiwan Semiconductor has significant advantages in the AI sector, with cloud AI semiconductor revenue contributions expected to continue growing, potentially reaching 34% by 2027. If a broader range of AI semiconductors is included, the related revenue share is expected to exceed 30% starting in 2025. However, there is uncertainty regarding the expansion of CoWoS capacity in 2026, and Morgan Stanley conservatively estimates the capacity for 2025 and 2026 to be 700,000 wafers/month and 900,000 wafers/month, respectively, based on the current situation